Resource Management: the Next Key Strategy Discipline?

Some resources are increasingly rare. It means that their cost will continuously increase. Have companies taken account of the fact resources will always cost more? Some of them are already thinking about it, like Total awarded about the fact that there will be not more oil in 2050. Other resources like gold, tin and copper will continuously price increased. How companies should dealing with it?

At first, resources need to be considered as an essential production factor. Usually when we read economics books and researchers, the two most important inputs are Capital and Labor. Of course they take in account the others such as Laws and Raw of Material but most of theories considered they are equivalent for every companies of a country. If it’s true for laws, it’s not true anymore for resources. Adam Smith and the early economics considered theses resources as inexhaustible. Nowadays, many economics such as Solow and Stiglitz developed a natural resource economics.

             Resources considered as continuously increasing cost means that production costs will ever-increasing even if some solutions are found to decrease others' costs. On the long term, continuous increasing resource cost will have an impact on the company structure and can be the occasion for companies to take competitive advantages on their competitors.

             We have already seen this situation in our contemporary history. Michel Thiry _ author of Value Management Practice_ gives us the example of industries during the World War II. Shortages of critical resources, such as steel and aluminum, forced manufacturers to use available, seemingly inferior materials and alternate design. He says that “creativity became key”. When the inexpensive products performed better than the originals, value engineering was born.

              So, Innovation can do two simple things:

              1)      Doing more with less

              2)      Doing better with another resource: technology and creativity can be a way to find substitution resources for a company.

        In any case, resource management becomes a key strategy discipline. Focusing on how creating value and risk management is not enough. On this model, we see that basically, the business model is based on these two dimensions.

Resource management will be for many companies the way to create value (profit) or at least to minimize the lost of value.

How dealing with this ever-increasing resource cost? Companies should think about it on two levels:

1)      Short term: doing a serious and rigorous resource audit to avoid any resources wastes.

2)      Long term: re-thinking the product and changing their resources need using R&D and technology.

              Obviously, resource management will become a key strategy discipline and will be considered as important as risk management or supply chain. 

Why doing Good-Better-Best Prices Instead of Finding the Perfect Price?

SeaWorld Orlando Dine with Shamu

I have just learned that what is considered as the best restaurant in the world _el Bulli_ was actually unprofitable. Why? Because the restaurant was only open from June to December for a total of 8000 clients a year. Each client used to pay the same price -$250- for a 25 dishes meal. It means that one dish cost approximately 10 euros! It’s less than a pizza in Madrid! But the restaurant was booked one year in advance (in fact it was booked the before its closure period).

Technically, it means that they didn’t find the equilibrium price. The demand was much more superior that the supply for this price. But the question is : Is finding this price the better solution for a company?

I do believe that Rafi Mohammed is right when he says that “even if you can determine your product's perfect price, you end up in what I call a "Pricing Catch-22": no matter what price you set, you'll inevitably create missed profit opportunities. Some people would have paid more, while others would have purchased if only the price had been lower”.

 

On a graph, it means that you try not to find the perfect price, but you try to do the integral of the demand curve. In that way, you can fix all the demand of your customers.

 

But what does that mean? We can take two examples to illustrate that. Usually, it works quite well for entertaining companies. We can take theme parks such as Sea World Orlando or Disneyland Paris in France. Both of them have an equilibrium price which is about $60 a day and per person. The idea is to find a new offer without changing the product. For Sea World for example, you can choose amongst an array of extra options (more than 17!) such as “animal interactions”, “exclusive tours”, “exclusive dining” and ”quick queue”. The normal admission is $80. With these options you can pay more than $500, just for one ticket!

 

Here is a graph I made showing what is happening. You target all your customers with different offers and different price. Ideally, the park can propose an offer per customer_ which is of course now impossible.

 

Another example is Disneyland Paris. The normal admission is 74 euros. At this price, you have people who buy them without problem (usually foreigners). But you also have the “francilien ticket” at 30 euros. At this price, you have to say which day you are coming at the park. You cannot change the date or the name on it. Doing this, both parks don’t really change their original offer _ they are still theme parks with attractions_ but they find a price for everyone interested by spending a day in the park.

 

With a good-better-best price strategy, you reach some people would have paid more that your original price, while others would have purchased if only the price had been lower. Moreover, customers are more comfortable with this pricing strategy. There is no more this kind of ultimatum: “you take it or you leave”. 

 

With a perfect price strategy, companies are missing significant profit opportunities. Customers are better served and profits are enhanced by serving new customers as well as reaping higher margins with a good-better-best price strategy.

You can read all the theory of Rafi Mohammed, pricing strategy consultant in his bookThe 1% Windfall : How Successful Companies Use Price to Profit and Grow256 pagesHarperBusiness; 1 edition (March 16, 2010)

Are companies doing strategy or planning?

In his recent book, Roger Martin explains to us that if most of companies want to do or to get a strategic plan, they actually do a planning for the future. They do so because they establish a long list of initiatives with timeframes associated and resources attributed.

Actually, it’s not so easy to see a real difference between a budget and a strategy. According to Roger Martin, there are two main reasons. The first one is that nowadays, the finance is deeply involved in a strategic plan. So much, that it’s becoming difficult to see a real difference. The second one is because people don’t like some much changing. It’s not easy to re-think its position on a market, its business model and all its organization.

Strategy is not planning. I found his definition of strategy quite accurate: “it is the making of an integrated set of choices that collectively position the firm in its industry so as to create sustainable advantage relative to competition and deliver superior financial returns”. Strategy has to be at the origin of the initiatives and absolutely not the initiatives themselves.

To know if you are doing a strategy or a planning, you need to ask you some questions about your winning aspiration, the place you want to play, how you will win and also about your management system.

Check out this interview of Roger Martin he gave to the Harvard Business Review. In less than three minutes, you have an amazing definition of strategy:

You can also clik here to see all the interview.

In his book, Roger Martin gives us another advice. Your strategic plan should not be longer than 5 pages. He tells us an interesting anecdote. He was working for a huge $10 billion successful company and his CEO. They worked all day long together and at the end of the day_ thanks to a good amount of pre-work_ you set up a strategic plan. The CEO was troubled and asked “Is it all we have to do?. Roger Martin had to explain him his thought about strategy and at this end it worked. Moral of this story: quantity doesn’t mean quality.

Article from the new book of Roger Martin and A.G Lafley:
Playing to win: How Strategy Really Works?
Harvard Business Books
272 pages.

When sould we make decisions ?

Director of the strategic marketing management executive program at the Standford University, Baba Shiv's research expertise is in the area of neuroeconomics. He worked on the role of neural structures related to emotion and motivation in shaping decisions and experiences.

His recent work examines the interplay of the brain's "liking" and "wanting" systems and its implications for marketing, innovation, leadership and decision making. He tries to give answers to questions like : Does a wine's price tag price affect the pleasure one experiences? or Are we more able to make decisions in the morning or in the afternoon?

In this interview, he gives us his point of view about decision making :